The combined GDP of the ten-member Association of Southeast Asian Nations (ASEAN) is already significantly larger than Indian GDP. The bloc’s GDP will exceed Japanese GDP by 2028, according to IHS Global Insight forecasts.

ASEAN’s economic ascent has been propelled by the rapid growth in trade and investment with China, supported by important trade liberalisation initiatives such as the ASEAN Free Trade Area (FTA) as well as the China-ASEAN FTA

ASEAN will be one of the world’s fastest growing consumer markets over the next two decades, with ASEAN GDP forecast to increase from US$2.3 trillion in 2012 to US$10 trillion by 2030.

Rise of ASEAN

As an economic force, ASEAN has become the third growth engine within emerging Asia after China and India. It is playing an increasingly important role in regional trade and investment growth. This is particularly important at a time when the medium-term growth outlook for two of the G3 economies, the EU and Japan, is for protracted weakness due to high government debt levels and fiscal consolidation.

Over the next two decades, ASEAN will also continue to benefit from the rapid growth of the two Asian BRIC economies, China and India. Another key factor driving ASEAN’s ascendancy will be the sustained economic growth of Indonesia, which is forecast to become a US$4-trillion economy by 2030, larger than South Korea and Australia in terms of GDP size.

This will help make ASEAN an increasing important market for international businesses across a wide spectrum of industries. The ASEAN region will be one of the world’s fastest growing consumer markets during the next two decades. Overall, emerging Asian retail sales are forecast to grow at over 10% per year, compared with around 2% for the EU.

The rapidly growing size of consumer expenditure in ASEAN projected over the next 20 years will result in a major transformation of the structure of global multinational corporations, as United States and European multinationals dramatically transform their corporate strategies towards the Asia-Pacific region. ASEAN will account for a higher share of total annual investment into Asia-Pacific, as well as having a rising share of multinational corporation workforces and a greater voice in global top management for most multinationals.

The fast pace of growth in Asian consumer markets will also support the rise of ASEAN multinationals in many different industry segments, ranging from manufactures such as food processing and electronics to services such as banking, insurance, hotels, and healthcare.

ASEAN consumer markets will become increasingly important for global multinationals, as ASEAN middle-class incomes rise rapidly, driving demand for a wide spectrum of market segments ranging from fast-moving consumer goods to luxury goods such as watches and designer clothing as well as services such as financial products and health care.

The rapid growth of the ASEAN region will require large-scale investment inflows into physical infrastructure such as roads, rail networks, ports and power generation. Equally important will be the development of human capital, with investment in tertiary educational infrastructure and vocational training capacity being critical to economic development.

The ASEAN region will therefore become an increasingly important engine of growth for the Asia-Pacific region, contributing to sustained strong growth in trade and investment flows. For the ASEAN region itself, the sustained expansion of ASEAN GDP will help to increase the importance of domestic demand as a long-term growth driver, supported by rapidly rising household incomes.

Key Growth Drivers

The economic development of ASEAN has gained momentum through a number of trade and investment liberalisation initiatives.

The creation of the ASEAN Free Trade Area, which was implemented in 2010 with the elimination of tariffs on trade among the first six ASEAN member nations, has been a catalyst for more rapid growth in trade among ASEAN nations.

The establishment of free trade agreements (FTAs) with other key Asia-Pacific trade partners, notably China through the China-ASEAN FTA and with India through the ASEAN-India FTA, has also been important in strengthening trade ties with the Asian BRIC nations. In 2012, ASEAN-China trade is estimated to exceed US$300 billion, with ASEAN-India trade reaching around US$D70 billion. ASEAN exports to China have been growing very rapidly over the past decade, creating an important growth driver for the export sectors of most ASEAN nations.

Negotiations are progressing for further economic co-operation through the ASEAN Economic Community vision, involving increasing economic integration in trade in services and investment flows, and facilitation of flows of skilled labour.

At a national level, the macroeconomic reforms that have taken place since the East Asian financial crisis during 1997-98 have also strengthened some of the largest economies at the core of the ASEAN bloc. This has resulted in improved macroeconomic stability as governments in a number of crisis-affected ASEAN countries, notably Indonesia, Thailand, and Malaysia, undertook painful reforms and economic restructuring.

Among their key reforms were sustained efforts to reduce government debt levels as a share of GDP, reducing their external account vulnerability through increasing foreign-exchange reserves, and strengthening domestic banking systems through banking sector consolidation, improving capital adequacy ratios and reducing non-performing loans. This has improved the resilience of a number of the major ASEAN economies to external shocks, which was demonstrated during the global financial crisis in 2008–09.

ASEAN Stars

The Indonesian economy has become one of the most dynamic in Asia (see chart below). The far-reaching economic reforms undertaken since 2004 have created more stable macroeconomic fundamentals for the Indonesian economy, with the government debt to GDP ratio having fallen sharply since 2004, reaching around 25% of GDP by 2012.

Indonesia’s strong natural resources base remains a key strength, particularly due to strong long-term demand growth from China and India for Indonesian thermal coal required for meeting large-scale power generating capacity expansions planned in these two Asian BRIC nations.

Furthermore, the large population of 250 million and fast-growing urban middle class has made Indonesia one of the most rapidly growing consumer markets of emerging Asia. The overall size of the Indonesian GDP is projected to exceed US$1 trillion by 2013, according to IHS Global Insight forecasts, and will rise above US$2 trillion by 2021. This will continue to strengthen Indonesia’s role as the economic hub of the ASEAN economy, and an important market for the rest of ASEAN.

Malaysia, Thailand and the Philippines will also be increasingly important domestic markets for intra-ASEAN trade and investment, with the GDP of each of these economies expected to exceed US$1 trillion by 2030.

The Philippines is showing renewed economic momentum, helped by the rapid growth of its outsourcing services industry, as well as continued strong inflows of remittances from workers abroad.

Thailand is benefitting from its strong competitiveness as a manufacturing hub for autos and electronics. In Malaysia, the Economic Transformation Programme is delivering significant results, boosting investment into strategic growth sectors in key industries such as financial services, tourism, and oil and gas.

Singapore will continue to play a pivotal role in ASEAN as a highly advanced financial services, logistics, and knowledge hub, providing essential high-value adding services to facilitate regional growth and development. The new frontier ASEAN economies of Vietnam, Laos and Cambodia are expected to grow rapidly, supported by ASEAN economic and trade initiatives as well as the rapid economic growth of China.

With Myanmar’s population the fourth largest in ASEAN, at around 50 million people, the unleashing of the Myanmar economy could create a significant boost to ASEAN regional growth as well as intra-ASEAN trade and investment flows. Myanmar’s GDP growth rate is already projected to be around 6% per year until 2020, with Myanmar’s GDP forecast to double to US$132 billion by 2025, according to IHS Global Insight forecasts.

A key macroeconomic trend that will support the economic development of some ASEAN economies is the rising cost of labour in coastal China, which is eroding the competitiveness of low-cost manufacturing in the Pearl River and Yangtze River deltas. Although much of this low-cost manufacturing will remain in China but gradually relocate inland, multinationals are also expected to increase their foreign direct investment into the low-cost manufacturing sectors of Vietnam, Indonesia, Philippines, Cambodia, Laos, and Myanmar.

Outlook

ASEAN has already become the third emerging market growth engine within Asia-Pacific, with the current size of ASEAN GDP significantly larger than Indian GDP. With the outlook for sustained strong economic growth over the next two decades across the ASEAN region, household incomes are set to rise rapidly, making the ASEAN region one of the world’s fastest-growing consumer markets.

The rapid growth of ASEAN is creating opportunities across a wide spectrum of industries, as the rapidly growing ranks of middle-class households demand a range of products, such as fast-moving consumer goods and luxury goods, as well as services such as financial services, education, healthcare, and tourism products. As in other Asian emerging markets, infrastructure, urbanisation, and environmental challenges will be key strategic priorities, creating significant market opportunities in these sectors.

The economic and political co-operation among South-East Asian countries under the framework of ASEAN has continued to progress in a positive direction, with the ASEAN Free Trade Area and the Chiang Mai Initiative Multilateralisation being key milestones. These achievements continue to indicate that economic co-operation and trade liberalisation among ASEAN member countries is acting as an important positive force for economic development and poverty reduction in emerging Asia.

About the Author
Rajiv Biswas is Chief Asia-Pacific Economist at US-listed global information company IHS Global Insight.